Hiding Assets and Income in Offshore Accounts Again Made the IRS “Dirty Dozen” List

On February 5, 2016, the IRS again stated that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

The problem with offshore accounts is two-fold. On the one hand, there are numerous con-artists who use offshore accounts to lure taxpayers into scams and schemes. The second and a much larger problem for the IRS is the fact that many U.S. taxpayers used offshore account to hide assets and income from the IRS.

Fighting the strategy of using offshore accounts to hide assets and income has been one of the top priorities of the IRS since the early 2000s. The problem has been complicated by the fact that there are many legitimate reasons for having an offshore account – a fact that, unfortunately, has been largely ignored by journalists and the public opinion in the United States. Therefore, it is necessary for the IRS to approach the problem of offshore accounts carefully in order to avoid hurting innocent people.

Over the years, the IRS (with the help of Congress) has chosen five different and interrelated strategies to fight tax evasion through offshore accounts.

1. IRS Civil and Criminal Enforcement

IRS examinations, audits, subpoenas, and criminal enforcement play a central role in the IRS war against using offshore accounts to hide assets and income. The ability of the IRS to enforce U.S. tax laws is amazingly broad and the IRS will use it whenever it wishes.

Since 2009, the IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Hence, brute force still looms large in fighting tax evasion through offshore accounts and creates enormous (and fully justified) fear in the hearts of many U.S. taxpayers. This fear is also central to the IRS ability to use the other four strategies listed below.

2. Extensive Reporting Requirement for Owners of Offshore Accounts

As owners of offshore accounts have already noticed, the number of reporting requirements with respect to offshore accounts has risen dramatically. In addition to FBAR (which has existed since the 1970s), FATCA introduced Form 8938 in 2011. Furthermore, Form 8621 and Schedule B to Form 1040 have been modified to require additional reporting with respect to offshore accounts. Other forms also indirectly require reporting of foreign accounts (through reporting of ownership or a beneficial interest in a foreign entity or a foreign trust).

By forcing U.S .taxpayers to do extensive reporting with respect to their offshore accounts, the IRS has achieved two goals at the same time. First, it has collected an enormous amount of information with respect to U.S. offshore accounts and their owners. This information can be used in a later investigation to track fund and identify patterns of behavior. In a short while, due to the implementation of FATCA in many jurisdictions around the world, this information will also be used to compare the banks’ information with the information provided by the taxpayers on their information returns.

Second, the enormous fines associated with offshore accounts reporting can create huge tax liabilities for noncompliant taxpayers. This provides the IRS with a financial incentive to pursue these taxpayers. These potentially disastrous noncompliance fines also serve to deter many taxpayers from engaging in risky tax evasion schemes.

Of course, one of the biggest problems associated with these reporting requirements is that the majority of persons, including tax accountants, never heard of them until they were already in trouble. When the IRS pressure started to rise, it was already too late for a lot of U.S. taxpayers to do simply current compliance and they had to pay fines to the IRS. It is important to emphasize that the process is by no means over – on the contrary, as the complexity of U.S. tax compliance continues to rise, a lot of taxpayers (and their accountants) still do not know about a lot of these requirements.

3. Voluntary Disclosures

In order to alleviate the reporting noncompliance nightmares for U.S .taxpayers, the IRS created a number of voluntary disclosure programs. The early programs were not very successful; however, after the IRS stunning victory in the 2008 UBS case, the 2009 Offshore Voluntary Disclosure Initiative (OVDI) turned out to be a huge success. The 2011 OVDP, 2012 OVDP and 2014 OVDP with 2014 Streamlined Compliance Procedures followed in quick succession and with even bigger success. Since 2009, more than 54,000 OVDP disclosures took place and the IRS has collected more than $8 billion; this is not taking into account the huge surge in Streamlined disclosures since 2014.

The information that has been collected through OVDP is used to identify noncompliant individuals and entire schemes to evade U.S. taxes through offshore accounts. The IRS then uses this information to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas using offshore accounts. The IRS works closely with the Department of Justice (DOJ) to prosecute these tax evasion cases.

4. Swiss Bank Program

In addition to the voluntary disclosure program for individuals, the IRS also created a voluntary disclosure program for Swiss banks. Such voluntary disclosure program is, of course, an unprecedented event – never in history did one country force another country’s entire bank system to do a voluntary disclosure on the territory of that other country.

While the debate over this breach of Swiss sovereignty (although, technically, the Swiss government agreed to the Swiss Bank Program) is interesting, for the purposes of this article, it is important to note that Swiss Bank program was a huge step forward in attacking the usage of offshore accounts to hide assets and income.

By the end of February of 2016, about 80 Swiss banks went through Category 2 voluntary disclosure and paid penalties to the U.S. government. They also turned over enormous amount of information regarding their U.S. accountholders and the various schemes that Swiss bankers developed to hide assets and funds from the IRS. In essence, the Swiss bankers turned over to the IRS substantially all of the blueprints for tax evasion that they had created.

5. FATCA

The final major strategy for fighting the practice of using offshore accounts to hide assets and income from the IRS is the famous Foreign Account Tax Compliance Act or FATCA. Ever since FATCA entered into force, it has changed the global landscape of international tax compliance. One of the most salient features of FATCA is the fact that it forces foreign banks to report to the IRS all of the offshore accounts that they can identify as owned by U.S. persons.

This groundbreaking piece of legislation has had an enormous impact on the ability of the IRS to identify noncompliance by U.S. persons, because foreign banks now act as its agents and voluntarily disclose U.S. persons and their offshore accounts.

Contact Sherayzen Law Office for Help With Your Offshore Accounts

If you have undisclosed offshore accounts, you should contact Sherayzen Law Office as soon as possible. We have helped hundreds of U.S. taxpayers to bring their U.S. tax affairs in order while saving millions of dollars in potential penalty reductions. We furthermore help to reduce your income tax liability as a result of your voluntary disclosure and post-voluntary disclosure tax planning.

Contact Us NOW to Schedule Your Initial Consultation!

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